What is the social cost of carbon?

The social cost of carbon may be the most important number you’ve never heard of. U.S. climate legislation is stalled in Congress, but in the meantime, the Obama administration is trying to fill the gap by considering climate impacts in the regulatory process: from the tailpipe emissions limits and gas mileage standards unveiled April 1, to energy-efficiency standards for many types of residential appliances and commercial equipment.

This is important work; U.S. action to reduce greenhouse-gas emissions is long overdue, and it’s crucial in the global picture, both because of our large share of total emissions, and because of our ability to influence other nations. But it’s also important to do this right, and a look at how the administration has handled the social cost of carbon (SCC) raises some serious concerns.

The SCC is the estimated price of the damages caused by each ton of carbon dioxide (CO2) released into the atmosphere. In cost-benefit analysis of government regulations, it’s a sort of volume dial: The higher the SCC, the more stringent the standards — if it’s $5, say, only regulations that cost less than $5 to implement would be deemed worthwhile; if it’s $500, the demands imposed on polluters could be correspondingly greater. (With no price on carbon emissions at all, of course, the effective price is $0, and no reductions are “worthwhile.”)

So far, the administration’s interagency working group that has been studying the SCC has come up with a range of values, with a “central” estimate of $21 per ton of CO2 in 2010, or roughly 20 cents per gallon of gasoline. Over time, the SCC would rise, but only to $45 per ton (in 2007 dollars) by 2050. That’s far lower than the projected cost of many substantive mitigation measures, and if widely adopted, it could result in ineffectual regulations that would barely reduce U.S. emissions, if at all.

Even worse, the $21 SCC could easily find its way into discussions in Congress, and be taken as the recommended level for a carbon tax or permit price. If that happens, there is no way the United States could reach the widely discussed, science-based goal of cutting emissions by 80 percent by 2050, which would require a much higher price on carbon. Given how cost-benefit analyses dominate U.S. policymaking, a $21 SCC could have a devastating impact on environmental legislation.

But this doesn’t need to be the last word. In fact, it absolutely shouldn’t be, because the analysis that led to that number is based on deeply flawed economics, omissions, and poor value judgments. We’re not alone in pointing this out: The Environmental Defense Fund, the Natural Resources Defense Council, the Pew Center, the Sierra Club, the Union of Concerned Scientists, and others raised many of the same points we’ve made in formal comments to the Environmental Protection Agency as part of its tailpipe emissions standards review.

What’s wrong with the analysis behind the $21 SCC? For starters, it relies on an overly narrow review of climate economics, relying on a handpicked set of models — FUND, PAGE, and DICE — that happen to produce very low SCC estimates. All three models have serious problems: FUND mistakenly predicts a huge reduction in mortality due to the early stages of climate change, then values the lives allegedly saved on the basis of their per capita incomes. PAGE, in its default mode, assumes that developed nations will adapt to climate change at near-zero cost (it offers a wide range of alternate estimates, the higher of which the working group ignored). DICE assumes on very thin evidence that most people in the world would prefer, and would be willing to pay for, a warmer climate, and recommends a very slow “climate policy ramp” as a result.

We also found that the working group was aggressive in “discounting” the value of future costs, considering rates of 2.5 to 5 percent per year that trivialize future damages, suggesting it is worth spending very little to protect the environment our descendants will inherit. And the estimates fail to consider unmonetizable costs — from the true value of human lives, to the value of our ecosystems.

A last and very serious concern is that the SCC calculations don’t take into account the small but hugely important risk of catastrophic climate damage. As climate scientists refine their models, they are finding that a significant degree of uncertainty in their predictions is inescapable, and disastrous worst-case scenarios cannot be ruled out. Responding to the average projected damages — as measured by the SCC — may be less important than doing whatever it takes to eliminate the risk of catastrophe. Policy designed from this perspective would not rely on cost-benefit calculations, but rather would set a “safe” minimum standard, based on the scientific analysis of potential risks, and determine the least-cost strategies to meet it. The “cost” of carbon would equal the cost of those strategies.

There are too many open questions in the SCC calculation to recommend a precise alternate value based on the information now available; there is a need for more extensive research, examining the full range of available studies of climate damages and costs, and analyzing assumptions about the risks and magnitudes of potential climate catastrophes. In the United Kingdom, where carbon pricing and cost calculations have a longer, better-researched history, the latest estimate is a range of $41 to $124 per ton of CO2, with a central case of $83. We believe an expanded calculation of carbon prices for the United States should at least explore prices in this range, and should consider the policy options that such prices would open up.